Peer-To-Peer Lending

Peer-to-peer lending connects borrowers with lenders using online platforms or offline brokers. The platform serves as a middleman, managing the loan process but not providing the actual funds, which are supplied by the investors.

Unlike conventional business loans, peer-to-peer lending involves borrowing from multiple individual investors rather than a single financial institution. 

How does Peer-to-peer lending work?

Peer-to-peer platforms in the UK are regulated by the Financial Conduct Authority (FCA). To ensure a platform is regulated, you can verify its status on the FCA’s online register. 

There are a number peer-to-peer lending platforms in the UK, and most operate in a similar manner. On some peer-to-peer platforms, decisions are made almost instantly, allowing you to access funds within a few days.

The process begins with an online application that typically needs to include:

• details about your business, such as turnover, profits, trading history, and the loan amount you’re seeking
• supporting documentation such as bank statements and filed accounts, as well as clarification on how the loan amount will be used
• credit checks will be conducted on submission of the application.

If you meet the platform's initial criteria, your loan request is shared with a pool of investors. These investors can contribute small amounts to collectively make up the total loan you require.

If there is enough investor interest to fully fund your request, the loan amount is usually then able to be drawn down shortly after. 

If your loan is approved, you may need to pay an arrangement fee to the platform. Repayments, including interest, are then made in regular instalments over the agreed loan term.

What are the benefits?

There are a number of potential benefits to Peer-to-peer lending, including:

• accessibility: with accessible, easy-to-use online platforms, peer-to-peer lending has become one of the most straightforward and approachable options for alternative business financing
• wide range of platforms: there are several platforms that can support a wide variety of businesses and their funding needs
• different levels of funding available: the ability to tailor the amount you borrow should ensure you only borrow  what you need
• ease of use: the lending process is simple, with decisions made quickly, allowing funds to be drawn down quickly.
• no equity dilution: unlike types of Equity finance, there is no need to give up any part of your business to access the funding.

What are the potential drawbacks?

Like all finance types, Peer-to-peer lending can bring with it potential disadvantages, including:

• higher interest rates: these can be higher than you would expect to see for standard business loans or other finance types
• credit score dependent: Lenders typically perform credit checks, which can affect your credit score. While a lower credit score doesn’t automatically disqualify you from obtaining financing, having a good credit score is usually essential to secure the most favourable interest rates for a Peer-to-peer loan
• charges and fees: there may be fees that need to be paid to the platform or broker before you can access the Peer-to-peer loan
• personal guarantees: you could be asked to provide a personal guarantee for your loan. This means that you will be personally liable for repayment of the loan should your business default or becomes insolvent. (Note that sole traders, and partners in small partnerships, will always be personally liable already - no personal guarantee is required.)
• defaulting: failure to repay the loan could result in the debt being passed to a debt collection agency. This could result in court action being taken against you.

How do I access Peer-to-peer lending

You can look for peer-to-peer lenders by searching online. Once you identify one that fits your business needs, you can create an account with them.